Should I make contributions to a TFSA?

Chris R.

August 29, 2019 12:56

Updated

Saving is a great idea! However, your financial situation and savings goals are unique, so while we can't definitively answer this question for you, we can certainly talk about the advantages of this savings account. In your Total Rewards program enrollment process, you can contribute funds from your Wellness Pool to a Manulife Tax-Free Savings Account (TFSA).

TFSAs are an excellent account for housing your primary investments and savings, since all capital gains, interest, and dividends are tax-free. Every year you can contribute funds to your TFSA, up to an annual and cumulative limit ($6,000 and $63,500 respectively for 2019). Unlike the Registered Retirement Savings Plans (RRSP), TFSAs are flexible and perfect for short-term savings goals, as you can withdraw your money at any time without incurring taxes. You can use TFSAs to save for life milestones and buy just about any type of investment, such as mutual funds, ETFs, stocks, etc.

Overall benefits:

Zero tax. When you keep your investments in a TFSA, you won't pay any tax on your capital gains, interest, and dividends. Your savings will build and compound tax-free!

Flexibility. Unexpected bill or impromptu vacation? No worries. With a TFSA, you can withdraw your funds at any time. Withdrawals even return your contribution usage, so you can re-contribute that amount in future years (not within the same year).

Short and medium-term saving. RRSPs are usually a better choice for long-term retirement savings, but you can't beat a TFSA for varied, short-medium term savings goals such as vacations, weddings, or big purchases. If you're in a lower tax bracket, TFSAs are also a great choice since you have less to gain from RRSP tax refunds.

Things to remember:

Retirement savings. With great flexibility comes great responsibility! RRSPs might be a better choice if you struggle with sticking to retirement savings goals, since withdrawal penalties will discourage you from using your savings before retirement. Unlike TFSAs, RRSPs also allow you to defer income tax until you have a lower retirement tax-bracket.

Investment returns. Remember that the power of a TFSA lies in the tax-free gains of investment returns, including capital gains, interest, and dividends! If you're just using your TFSA as a high-interest savings account, you may not take full advantage of this power.

Limits. You're welcome to have multiple TFSA accounts with different financial institutions, so long as your combined contributions don't exceed your annual and cumulative limit. Your cumulative limit has been building since the creation of TFSAs in 2009, but will differ based on the year you turned 18. Please click here for more details on the CRA's website.

Click here to learn how to contribute to a Manulife TFSA, and click here to learn about RRSPs.